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An only child, Powell was born in Pittsburgh, Pennsylvania, the son of Nettie Manila (née Brady) and Horatio Warren Powell, on July 29, 1892. His father was born in West Middlesex, Pennsylvania (where Powell spent his boyhood summers), to William S. and Harriet Powell.[2] Powell showed an early aptitude for performing. In 1907, he moved with his family to Kansas City, Missouri, where he graduated from Central High School in 1910. The Powells lived just a few blocks away from the Carpenters, whose daughter Harlean also went to Hollywood, under the name Jean Harlow, although she and Powell did not meet until both were established actors.

Powell's most famous role was that of Nick Charles in six Thin Man films, beginning with The Thin Man in 1934, based upon Dashiell Hammett's novel. The role provided a perfect opportunity for Powell, with his resonant speaking voice, to showcase his sophisticated charm and witty sense of humor, and he received his first Academy Award nomination for The Thin Man.Myrna Loy played his wife, Nora, in each of the Thin Man films. Their on-screen partnership, beginning alongside Clark Gable in 1934 with Manhattan Melodrama, was one of Hollywood's most prolific, with the couple appearing in 14 films together.

In 1935, he starred with Jean Harlow in Reckless. Soon a serious romance developed between them, and 1936 found them united again in film and with Loy and Spencer Tracy in the screwball comedy Libeled Lady. Harlow died from uremia at the age of 26 in June 1937 before they could marry. His distress over her death, as well as a cancer diagnosis, caused him to accept fewer acting roles.

Powell's career slowed considerably in the 1940s, although he received his third Academy Award nomination in 1947 for his role as the cantankerous Clarence Day, Sr. in Life with Father. His last film was 1955's Mister Roberts with Henry Fonda, James Cagney, and Jack Lemmon. Despite numerous entreaties to return to the screen, Powell refused all offers, happy in his retirement.

In 1915, he married Eileen Wilson (1894-1942) who was born Julia Tierney, with whom he had his only child, William David Powell, before an amicable divorce in 1930. Powell's son became a television writer and producer before a period of ill health led to his suicide in 1968.

On June 26, 1931, Powell married actress Carole Lombard. The marriage lasted just over two years. They were divorced in 1933, though they too remained on good terms, even starring together in the screwball comedy My Man Godfrey three years later. Powell was devastated when he learned of her death in 1942.

Powell was engaged to actress Jean Harlow. After her sudden death in 1937, It is reported that a single white gardenia with an unsigned note was placed in her hands before she was interred, presumed to have been written by Powell. The note read, "Good night, my dearest darling". He also paid for her final resting place—a $25,000, 9×10-foot private room lined with multicolored imported marble located in the "Sanctuary of Benediction" of the Great Mausoleum, Forest Lawn Memorial Park, Glendale.

In 1937, Powell was diagnosed with cancer. He underwent surgery and experimental radium treatment which put the disease in full remission within two years. Given his own health and sorrow over Harlow's death, Powell did not undertake any film roles for over a year during this period.

On January 6, 1940, Powell married actress Diana Lewis, whom he called "Mousie,[4]" three weeks after they met. They remained married for forty-four years, residing primarily in Palm Springs, California, until Powell died at the age of 91.